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China: further guidance on distinguishing between labor dispatch and outsourcing

The Interim Provisions on Labor Dispatch were published by the Chinese Ministry of Human Resources and Social Security on January 24, 2014, and came into effect on March 1, 2014 ("Interim Provisions"). The Interim Provisions require that no more than 10 percent of a company's total workforce can be engaged through labor-dispatch arrangements (akin to independent contract workers in common law countries). Companies that are not currently compliant with the Interim Provisions must adjust their employment structure to comply with the 10 percent cap by March 1, 2016.

In order to comply with this cap requirement, many foreign invested enterprises ("FIEs") are contemplating outsourcing work originally undertaken by dispatch workers to third-party service providers. FIEs should be careful outsourcing work in this way as the Interim Provisions prohibit some forms of outsourcing and provide limited guidance on how to distinguish between legitimate outsourcing and prohibited indirect labor-dispatch arrangements.

A recent ruling issued by the Shanghai No. 2 Intermediate People's Court on May 15, 2014 ((2014) Hu Er Zhong Min Yi (Min) Zhong No. 408) provides us with some assistance to distinguish the difference between a legitimate outsourcing arrangement and indirect labor-dispatch arrangements prohibited by the Interim Provisions. In this case, the court emphasized that the third-party service provider was a true outsourcing arrangement because the service provider had management power over its workers, controlled the production process, and directly instructed, supervised, and managed its workers. By comparison, a prohibited indirect labor-dispatch arrangement would have arisen where the contracting company did not exercise direct management over the service provider's workers, nor did it instruct or control them.

Since the Interim Provisions are silent on how to distinguish these two arrangements, it is possible that courts and labor authorities of other jurisdictions in China may take into account other factors on a case-by-case basis. The control and management over workers, however, is likely to be one of the most important factors to consider in Shanghai as well as in other locales of China.

Compare jurisdictions: Employment & Labor: North America

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